🎧 Listen: In today's episode of The Journal podcast, DaveCBenoit explains how a small real-estate bank that became the bank of choice for the crypto world’s big players experienced a historic bank run
This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.
Ryan Knutzen: Last year the crypto world entered a crypto winter and it's raised questions about the future of the crypto industry's top bank Silvergate. Ryan Knutzen: For most of its history, Silvergate's business was making real estate loans. It had a handful of bank branches around the San Diego area, but in 2013, the bank's direction changed thanks to its CEO, a 60-year-old banking veteran named Alan Lane.Ryan Knutzen: Here he is in 2014.Ryan Knutzen: He's up to 26 grandkids as of this summer.
Alan Lane: I absolutely believe that Bitcoin and digital currencies are here to stay. They're not going away, which- Ryan Knutzen: Silvergate wasn't touching customers' crypto. Instead, it became a place for crypto companies to park their dollars, and this simple service became a way bigger hit than Lane expected. So big that lane eventually sold off most of the bank's original real estate business.
Ryan Knutzen: Before Silvergate, big investors, like hedge funds and pension funds, had to go through a lot of steps to move cryptocurrency from one crypto exchange to another. It was complicated and slow. So Silvergate stepped in and created the Silvergate Exchange Network. It allowed customers to move money between exchanges instantaneously. Silvergate launched its Exchange Network in 2017, and that's when its business really started taking off.
Ryan Knutzen: If Silvergate's pivot to crypto was going so well, why weren't other banks trying to do the same thing? Ryan Knutzen: If cryptocurrencies crashed and Silvergate's customers started pulling their money out all at once, it could pose big problems for Silvergate. It could mean a bank run. So Silvergate decided to play it safe. Instead of lending out all those deposits like most banks do, it decided to hang onto it and park it mostly in easy to sell investments like US treasuries.
Speaker 11: Tonight, the cryptocurrency world is reeling after the meltdown of one of its most popular trading platforms. Ryan Knutzen: As FTX imploded, the entire crypto ecosystem cratered. Investors pulled their money out of cryptocurrencies and out of Silvergate. Ryan Knutzen: And that was a time when famously bank runs nearly brought down the entire US financial system.Ryan Knutzen: How is it even possible for Silvergate to lose that many deposits in a matter of months and not completely collapse?Alan Lane: We had a playbook that we hoped we would never have to execute, right? Which is what do you do if you have sustained deposit withdrawals?
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